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Wells Fargo Option Players Predict a Post-Earnings Dip

WFC skeptics are buying puts and writing calls

by 1/10/2013 9:59 AM
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Options activity is heating up on Wells Fargo & Company (NYSE:WFC - 34.97), with both puts and calls flying off the shelves on Wednesday. By the time the dust settled, the financial concern had seen roughly 45,000 puts and 59,000 calls change hands, more than doubling its average single-session option volume. In fact, digging deeper suggests traders were employing both sets of options to place neutral-to-bearish bets on WFC.

On the put side, speculators scooped up the weekly 1/11 34.50-strike put, which saw open interest balloon by more than 8,600 contracts overnight -- the most of any strike. Plus, the majority of the soon-to-expire puts changed hands at the ask price, suggesting they were bought.

By purchasing the puts to open, the buyers are expecting WFC to breach the $34.50 level by the end of the day tomorrow -- which just so happens to encompass the company's turn in the earnings spotlight. More specifically, the volume-weighted average price (VWAP) of the puts was $0.38, meaning the buyers will profit if WFC drops beneath the $34.12 level (strike minus VWAP) after reporting earnings tomorrow.

Meanwhile, other skeptics exploited relatively pricey pre-earnings premiums to gamble on limited short-term upside for WFC. More than 14,300 calls traded at the January 2013 36 strike -- most of them at the bid price, hinting at seller-driven volume. Plus, open interest soared at the front-month strike overnight, confirming our suspicions of newly added positions.

By writing the calls to open, the sellers are expecting WFC to remain south of $36 through the end of next week, when January-dated options expire. In this best-case scenario, the calls will remain out of the money, and the sellers can retain the entire premium received from the sale. And, judging by WFC's ascending Schaeffer's Volatility Index (SVI) -- which now sits above 56% of all other readings of the past year -- the stock's short-term options are trading at a pretty penny ahead of earnings.

WFC Schaeffer's Volatility Index

From a broader sentiment standpoint, though, pessimistic positioning runs counter to the recent trend. During the past two weeks, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open almost twice as many WFC calls as puts. What's more, the 10-day call/put volume ratio of 1.95 ranks in the 74th percentile of its annual range, suggesting option buyers are initiating bullish bets over bearish at a faster-than-usual clip.

Technically speaking, WFC has underperformed the broader S&P 500 Index (SPX) by more than 3 percentage points during the past 60 sessions. Furthermore, the shares are struggling to conquer the $34-$36 neighborhood, which has contained nearly all of WFC's rebound attempts since October 2008 -- and could explain the affinity for shorting 36-strike calls.


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